Say Thanks

Remember a couple of months back when President Obama was secretly plotting to drive up gas prices in order to usher in an area of green and clean energy for all his Solyndra like buddies? (This, along with the same plot to walk guns into Mexico which would, in turn, lead to him being able to take guns away here at home.What a crafty Kenyan!)

Yeah, well, things didn't quite happen that way. 

In case you never heard about it, in April the Obama administration asked Congress to spend $52 million to regulate this speculation. According to the Washington Post, this included the following steps:

• Increase by a factor of six Commodity Futures Trading Commission (CFTC) surveillance and enforcement staff “to better deter oil market manipulation."

 • Boost 10-fold, to $10 million, the civil and criminal penalties against “firms that engage in market manipulation."

 • Give the CFTC authority to increase the trader margins — the amount of their own capital that traders must set aside for each bet. The administration officials said such authority “could help limit disruptions in energy markets,” according to the Post.

So what’s happened since April? Oil ended the month at $106, and as of June 22, it had lost 21 percent of its value — sitting at $84. I guess I under-estimated the impact of the CME’s boost in margin requirements for oil speculators. 

As I stated back when this flap started, the problem was never the president. The problem was the speculators. Why?

When regulators raise those requirements, oil speculation becomes less attractive to traders, and they place bets elsewhere. And when margin requirements drop, the traders pile into their oil speculations — confident that they can borrow enough to limit their downside while boosting their upside opportunity.

 In February 2011, when commodities exchanges raised the amount of their own capital that speculators must set aside in order to trade — according to Bloomberg, the New York Mercantile Exchange (NYMEX) increased its margin requirements 20 percent to $6,075 per contract, and the International Exchange (ICE) increased its margin requirement 7 percent to $5,200 – the price of oil fell 10 percent within a few months.

And a year later, the commodities exchanges cut the amount of capital that speculators need to set aside before trading — the Chicago Mercantile Exchange (CME) cut by 9 percent to $6,885 the amount that Nymex crude speculators have to post to trade the so-called front-month contract, according to MarketWatch – leading prices to soar to $109 that month.

A fine example of how the government can sometimes improve market outcomes and increase market efficiency. These speculators weren't actually trading in oil and were distorting the market. 

So, the next time you fill up at the pump. thank the president for implementing this plan. After all, he is saving you hundreds of dollars a year!